Establishing a trust is a powerful move to provide for your beneficiaries well into the future after you are gone. However, deciding who should manage that trust can be overwhelming for you and your loved ones. Both corporate trustees and family member trustees are common, but you will have to decide which one is right for your unique situation.
Here is what you should know about the role of a trustee and the advantages of both corporate and family member trustees.
What is a Trustee? Role and Responsibilities
Part of a comprehensive estate plan is naming someone to ensure that your wishes are carried out once you are gone. A trustee is a trusted member of your team with the skills, time, and even resources to manage your trust and plan. Certain responsibilities fall on the shoulders of a trustee, and you will want to ensure that the person or entity you name is up for the challenge.
Recordkeeping
Trustees are responsible for all of the recordkeeping of your trust. This can mean managing both the principal and income from the trust. If you name a family member or an individual as trustee, they can always outsource this to a third party with the legal experience to manage assets. Based on where you live and how payments are structured, this could be quite complex.
Tax Preparation
Tax preparation for the trust also falls to the trustee. They will have to prepare and file the payments with the IRS in a timely manner. Knowing the ins and outs of tax statutes is essential for maximizing the assets within the trust and minimizing the overall tax burden, which can reduce beneficiary payments. And this is no normal 1040. It’s a 1041, with which most tax preparers have little experience.
Administration
Most importantly, the trustee is tasked with the administration of your trust. They are responsible for approving requests for funds from the trust and balancing everyone’s needs. Suppose you have some future beneficiaries in the trust, like a minor child. In that case, they may have to balance the needs of existing beneficiaries and future ones to make sure assets are left for their provision.
They will also manage your investment in a strategic manner to make sure that your assets work as hard as possible for you and your future beneficiaries.
Why Consider a Corporate Trustee?
If you read the role and responsibilities of a trustee and thought that it might be too much for a family member to handle, you may consider a corporate trustee instead. Here are some of the pros and cons of enlisting an objective third party to manage your trust.
Pro: Skill and Experience
A corporate trustee has the skills and resources to effectively manage a trust. They have the staff and connections for any services you may need, including recordkeeping, tax filing, and more. Corporate trustees are equipped to handle anything you may throw at them.
Pro: Manage Familial Stress
A corporate trustee is impartial, which can save tenuous family relationships. Putting the role of trustee onto the shoulders of a family member can lead to conflict and strife if someone requests money from the trust. If they do not feel that it is in the best interest of the trust or could harm future beneficiaries, turning down the request can be difficult.
Pro: Ongoing Management
What happens if you name a family member as a trustee but they have health problems or pass unexpectedly? This can spell problems for your trust, but a corporate trustee takes that stress off of you and your family members. They can manage it for as long as necessary.
Con: Follows the Trust to the Letter
Of course, there is a downside to having a corporate trustee: they may be more strict on following the letter of the law. If someone requests funds from the trust and the corporate trustee feels it is not a good fit, they might not approve the request even if you would have wanted to help. A family member may be more flexible and willing to assist in the distribution of assets for qualified needs.
However, you can also consider this a pro. Corporate trustees are bound by their fiduciary duty. You can rest easy knowing that they will act in the best interest of the trust and not distribute money when they believe it is inappropriate to do so, such as requests from unscrupulous family members who are trying to take more than their fair share. And in all likelihood, they’ve seen it before.
Why Consider a Family Member Trustee?
While corporate trustees have significant benefits, you may have imagined choosing someone more personal for your trust. A family member trustee can fill in the gap with support from various tax and legal professionals. Here is what you should consider when making your choice.
Pro: Low Cost
While corporate trustees are hired for their professional expertise, a family member can often act as a volunteer for the role. They may have to hire experts to help them manage it, but their basic function is gratis for the trust.
Pro: Ties to the Family and Approval for Distributions
A family member trustee knows your beneficiaries intimately, in most cases. They know who is more likely to squander a distribution and who genuinely needs the financial assistance. This level of knowledge of your family can prove helpful for following the spirit of the regulations laid out in the creation of your trust.
Con: Lack of Experience
Most family members who are named as trustees do not have any experience with this type of work. They will likely need to bring in a team of experts to support them when it comes to long-term asset management and distribution. If they try to do it themselves, very expensive mistakes can easily occur. The tax schedule on a trust is very different from your normal rate.
Con: Potential for Conflict
The real downfall of a family member trustee is the likelihood of personal conflict when a tricky situation arises with your trust. It’s difficult for a family member to be impartial, meaning they could be influenced by their relation to the beneficiary or by a desire to avoid conflict in the family. These power dynamics can prove troublesome and stressful to many trustees.
Let Magellan Help You Decide
Are you still having trouble deciding whether a corporate trustee or a family member trustee is the right fit for your estate planning? Magellan can help you weigh the advantages of each and come up with a comprehensive estate, financial, legal, and tax plan to maximize your financial legacy for your beneficiaries.
Give us a call today to start thinking about how you can prepare your trust for the future!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.